Mainstream Economic Theory

References

• Wikipedia Article on Mainstream Economics

Definitions

• Stagflation
• • In economics, stagflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. Stagflation, once thought impossible, poses a dilemma for economic policy, as measures to reduce inflation may exacerbate unemployment.
• Rational Choice Theory
• • Rational choice theory refers to a set of guidelines that help understand economic and social behavior. The theory originated in the eighteenth century and can be traced back to the political economist and philosopher Adam Smith. The theory postulates that an individual perform a cost-benefit analysis to determine whether an option is right for them. Rational choice theory looks at three concepts: rational actors, self interest, and the invisible hand.
• Representative Agent
• • Economists use the term representative agent to refer to the typical decision-maker of a certain type. An economic model is said to have a representative gent if all agents of the same type are identical.
• Rational Expectations
• • Rational Expectations is an economic theory that seeks to infer the macroeconomic consequences of individuals' decisions based on all available knowledge. It assumes that individuals actions are based on the best available economic theory and information, and concludes that government policies cannot succeed by assuming widespread systematic error by individuals.
• Imperfect and Asymmetric Information
• • In contact theory, mechanism design, and economics, an information asymmetry is a situation where one party has more or better information than the other.
• Bounded Rationality
• • Bounded rationality is the idea that rationality is limited when individuals make decisions and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal.
• Incomplete Markets
• • In economics, incomplete markets are markets in which there does not exist an Arrow-Debreu security for every possible state of nature. In contrast with complete markets, this shortage of securities will likely restrict individuals from transferring the desired level of wealth among states.
• Imperfect Competition
• • In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition causes market inefficiencies, resulting in market failure. Imperfect competition usually describes behavior of suppliers in a market, such that the level of competition between sellers is below the level of competition in perfectly competitive market conditions.
• Heterogeneous Agents
• • In economic theory and econometrics, the term heterogeneity refers to differences across the units being studied. For example, a macroeconomic model in which consumers are assumed to differ from one another is said to have heterogeneous agents.
• Transaction Costs
• • In economics, a transaction cost is a cost occurred when making an economic trade when participating in a market.

Notes

Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to heterodox economics, which encompasses various schools or approaches that are only accepted by a minority of economists.

History

• Economics has always featured multiple schools of economic thought, with different schools having different prominence across countries and over time.
• Prior to the development of classical economics, the dominant school in Europe was mercantilism, which was rather a loose set of related ideas than an institutionalized school. With the development of modern economics and Adam Smith's 18th century Wealth of Nations, British economics became dominated by what is now called the classical school. This was succeeded by neoclassical economics. Continental Europe has a slightly different economic history.
• During the Great Depression, the school of Keynesian economics gained attention as older models were neither able to explain the causes of the Depression nor provide solutions. The merger of Keynesian macroeconomics and neoclassical microeconomics - called the neoclassical synthesis - dominated thought from the 50s to the 70s.
• In the 1970s, the consensus in macroeconomics collapsed as a result of the failure of the neoclassical synthesis to explain the phenomenon of stagflation. Prior to this, two schools of thought - New Keynesianism and New classical macroeconomics - emerged to rebuild macroeconomics using microfoundations to explain macroeconomic phenomena using microeconomics.
• Over the course of the 80s and 90s, these two schools merged in what is known as the new neoclassical synthesis to form the current consensus, which covers previously disputed areas of macroeconomics.
• The financial crisis of 2007-2010 and the ensuing global economic crisis exposed modelling failures in the field of short-term macroeconomics. While most macroeconomists had predicted the burst of the housing bubble, they did not expect the financial system to break.
• The term mainstream economics came into use in the late 20th century.

Scope

• Mainstream economics can be defined, as distinct from other schools of economics, by various criteria, notably its assumptions, methods, and topics.

Assumptions

• Several assumptions are used to underpin many mainstream economic models. These include neoclassical assumptions of rational choice theory, representative agent, and rational expectations.
• Much of modern economic mainstream modeling consists of exploring the effects that complicating factors have on models, such as:
• • imperfect and asymmetric information
  • bounded rationality
  • incomplete markets
  • imperfect competition
  • heterogeneous agents
  • transaction costs
• Originally, the starting point of orthodox economic analysis was the individual. Individuals and firms were generally defined as units with a common goal: maximization through rational behavior. The only differences consisted of:
• • he specific objective of maximization (individuals = utility, firms = profit)
  • The constraints faced in the process of maximization (individuals constrained by income or commodity prices; firms constrained by technology or availability of inputs)
• From this theoretical framework, neoclassical economists derived the political prescription that political action should not be used to solve the problems of the economic system. The solution ought to derive from an intervention on the above-mentioned maximization objectives and constraints. It is in this context that economic capitalism finds its justification.

Methods

• Some economic fields include elements of both mainstream economics and heterodox economics: for example, institutional economics, neuroeconomics, and non-linear complexity theory.

Topics

• Economics has been initially shaped as a discipline concerned with a range of issues revolving around money and wealth. However, in the 1930s, mainstream economics began to mutate into a science of human decision. In 1931, Lionel Robbins wrote:

Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

Schools of Historical Economic Thought

• Schools of Economic Thought Summary

This should be a summary of all the economic schools of thought, which I should look at closer in the future.

Ancient Economic Thought

• Refers to the ideas from people before the Middle Ages.
• Economics in the classical age is defined in the modern analysis as a factor of ethics and politics.
• It only began to be studied in the 18th century.

Islamist Economics

• Islamic economics is the practice of economics in accordance with Islamic law. The origins can be traced back to the Caliphate, where an early market economy and some of the earliest forms of merchant capitalism took root between the 8th and 12th centuries, which some refer to as Islamic Capitalism

Scholasticism

• Scholastics appraised economic activity largely from the hostile perspective of the Roman Catholic Church and accordingly, denounced as unjust such normal economic activities as the taking of interest on loans, speculation, and indeed, even the mere changing of prices.
• Economics in the thought of the Scholastics occupied a subordinate position, derivative upon their reflections on ethics and law.

Mercantilism

• Economic policy in Europe during the late Middle Ages and early Renaissance treated economic activity as a good which was to be taxed to raise revenues for the nobility and the church.
• Economic exchanges were regulated by feudal rights.

Physiocrats

• The Physiocrats were 18th century French economists who emphasized the importance of productive work, and particularly agriculture, to an economy's wealth. Their early support of free trade and deregulation influenced Adam Smith and the classical economists.

Classical Political Economy

• Classical economics was the original form of mainstream economics during the 18th and 19th centuries. Classical economics focuses on the tendency of markets to move to equilibrium and on objective theories of value.
• Neo-classical economics differs from classical economics primarily in being utilitarian in its value theory and using marginal theory as the basis of its models and equations.
• Chydenius, a Finnish priest, published a book The National Gain in 1765, in which he proposes the ideas of freedom of trade and industry and explores the relationship between the economy and society and lays out the principles of liberalism.

American School

• The American School owes its origins to the writings and economic policies of Alexander Hamilton, the first Treasury Secretary of the United States. It emphasized high tariffs on imports to help develop the fledgling American manufacturing base and to finance infrastructure projects, as well as National Banking, Public Credit, and government investment into scientific and technological research and development.

French Liberal School

• 19th century French school that voraciously defended free trade and laissez-faire capitalism. They were primary opponents of collectivist, interventionalist and protectionist ideas. This school was a forerunner of the modern Austrian school.

Historical School

The historical school of economics was an approach to academic economics and to public administration that emerged in the 19th century in Germany, and held sway there until well into the 20th century. The Historical school held that history was the key source of knowledge about human actions and economic matters, since economics was culture-specific, and hence not generalizable over space and time. The School rejected the universal validity of economic theorems. They saw economics as resulting from careful empirical and historical analysis instead of from logic and mathematics. The School preferred historical, political, and social studies to self-referential mathematical modelling

English Historical School

• Heavily critiques the deductive approach of classical economists. The school revered the inductive process and called the merging of historical fact with those of the present period.

France Historical School

• 19th century French school that voraciously defended free trade and laissez-faire capitalism. They were primary opponents of collectivist, interventionalist and protectionist ideas. This school was a forerunner of the modern Austrian school.

Georgist Economics

• Georgism is an economic philosophy proposing that both individual and national economic outcomes would be improved by the utilization of economic rent resulting from control over land and natural resources though levies such as a land value tax.

Ricardian Socialism

• Ricardian socialism is a branch of early 19th century classical economic thought based on the theory that labor is the source of all wealth and exchange value, and rent, profit, and interest represent distortions to a free market. The pre-Marxian theories of capitalist exploitation they developed are widely regarded as having been heavily influenced by the works of David Ricardo.

Marxian Economics

• Marxian economics descended from the work of Karl Marx and Friedrich Engels. This school focuses on the labor theory of value and what Marx considered to be exploitation of labor by capital. Thus, in Marxian economics, the labor theory of value is a method for measuring the exploitation of labor in a capitalistic society rather than simply guessing the theory of price.

Anarchist Economics

• Anarchist economics comprises a set of theories which seek to outline modes of production and exchange of goods not governed by coercive social institutions.

Distributism

• Distributism is a Catholic economic philosophy developed late 19th / early 20th century that pursues a third way between capitalism and socialism, desiring a third way to order society according to Christian principles of justice while still preserving private property.

Institutional Economics

• Focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behavior.

Neoclassical Economics

• The science which studies human behavior as a relation between scarce means having alternative uses. The definition scarcity is that available resources are insufficient to satisfy all wants and needs; if there is no scarcity and no alternative uses of available resources, then there is no economic problem.

Lausanne School

• Extension of the neoclassical school.
• Credited with playing a central role in the development of mathematical economics. For this reason, the school has been referred to as the Mathematical School.

Austrian Economics

• I have already written about this.

Stockholm School

• Like Keynes, this school came to the same conclusions in macroeconomics and the theories of demand and supply.

Keynesian Economics

• Keynesian economics has developed from the work of Keynes and focused on macroeconomics in the short-run, particularly the rigidities caused when prices are fixed.

Chicago School

• Neoclassical school of economic thought associated with the work of the faculty at the University of Chicago notable particularly in macroeconomics for developing monetarism as an alternative to Keynesianism.

New Institutional Economics

• Perspective that attempts to extend economics by focusing on the social and legal norms and rules that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics. It rediscovers aspects of classical political economy.